BT Group is in Talks to Buy EE, but it Could Buy 02

Deutsche Telekom AG and Orange SA on Wednesday confirmed they are in talks to sell their U.K. cellular venture EE Ltd. to BT Group plc, which is weighing a purchase of a domestic cellular company about a decade after selling its own wireless network to Telefónica SA.

"Deutsche Telekom and Orange are having highly preliminary exploratory discussions with British Telecom, although it is too early to state whether any transaction may occur," the companies said.

BT, the former U.K. monopoly phone company, Monday said it was considering such a purchase and confirmed it was in talks to buy back its network – now doing business as O2 – from Telefónica. The London-based suitor said it was also in talks with another, unknown company with speculation correctly focusing on EE.

European telecoms are scrambling to offer customers quad-play services — broadband, entertainment content and fixed-line and wireless phone services — sparking widespread consolidation. BT is already the U.K.'s biggest broadband provider because of its history as the legacy phone company and will soon begin reselling cellular services from EE to offer quad play.

Buying EE would make BT the U.K.'s No. 1 cellular network operator with 27 million customers. O2 has 23 million. Analysts have said a purchase of either would cost about £9 billion ($14.2 billion) but have said almost unanimously that such a deal would make sense.

Investors appear to agree: the shares gained 3.1%, or 12.20 pence, to 408 pence ($0.64) in afternoon London trading. Telekom gained 1.4%, or €0.18, to €13.46 ($16.76) in Frankfurt while Orange slid less than 1%, or €0.085, to €13.745 in Paris.

Bonn-based Telekom and what was then France Telecom SA, of Paris, in 2009 agreed to merge their U.K. cellphone companies into a joint venture originally known as Everything, Everywhere after failing to find buyers for the businesses. The U.K. market was seen as saturated and offering little room for growth until smartphones and wireless broadband sparked a renaissance in cellphones.

The quad-play gambit has European cell companies handpicking their favorite markets while using legacy assets in uninteresting markets to raise cash. Should BT opt for EE, Orange could use the cash to help finance its agreed €3.4 billion takeover of Spanish cable company Jazztel plc.

Telefónica has played a pivotal role in the quad-play-based reshaping of the European phone landscape. Last year, it sold its U.K. broadband operations to British Sky Broadcasting Group plc for £200 million in a sign it was also losing interest in that market — it also paid €8.6 billion earlier this year for the German E-Plus cellular unit of Royal KPN NV to become Germany's biggest cellular provider.

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